IB2-7

Question 1

Name the 6 instruments of Trade Policy

Answer 1

1) Tariffs (specific tariffs and ad valorem tariffs)
2) Subsidies
3) Import quotas and voluntary export restraints (tariff rate quota + voluntary export restraint (VER))
4) Local content requirements
5) Administrative policies
6) Antidumping policies

Question 2

What is tariffs and what is the two types of tariffs?

Answer 2

A tariff is a tax levied on imports (or exports). Two categories:

• Specific tariffs: levied as a fixed charge for each unit of a good imported (fx. 3 USD per barrel of oil)
• Ad valorem tariffs: levied as a proportion of the value of the imported good (percentage)

Question 3

Who wins and who loses from tariffs?

Answer 3

Winners: The companies producing the goods + the government gains because of the increased revenues from either the tariffs itself or the taxes paid by the domestic producers
Losers: consumers because of higher prices due to the lack of competition.

Question 4

What is a subsidy?

Answer 4

A subsidy is a government payment to a domestic producer.

Forms of subsidies (examples):

• cash grants
• low-interest loans
• tax breaks
• government equity participation

Question 5

How do subsidies help domestic producers?

Answer 5

1) competing against foreign imports

2) gaining advantages for export markets

Question 6

What is import quotas?

Answer 6

An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms.

Question 7

What is a tariff rate quota?

Answer 7

Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota.

Example:
The US governments allows import of 1 million cars a year with an import rate of 10 %. Car number 1.000.001 will be charged with another tariff rate - lets say 50 %.

Question 8

What is a voluntary export restraint (VER)?

Answer 8

A VER is a quota on trade imposed by the exporting country.

This sounds weird but it is typically at the request of the importing country’s government.

This could be the Japanese government limiting the automobile industry to export a maximum of 800.000 cars per to the US

Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they dont agree.

Question 9

What is local content requirements?

Answer 9

A local content requirement is a requirement that some specific fraction of a good have to be produced domestically.

This could be that at least 25 % of the components in iPhones should be produced in the US or that at least 25 % of the value in an iPhone should be added from US-owned and based companies.

Question 10

What is administrative policies?

Answer 10

Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country.

Example FedEx had a tough time expanding to Japan because the Japanese customs insisted on opening a large proportion of express packages to check for pornography - this of course delayed many shipments and customers found out carriers “with beter service”

Question 11

What is dumping and how does it work?

Answer 11

Dumping is variously defined as selling good in a foreign market at below their costs of production or selling goods in a foreign market at below their “fair” market value.

Dumping is viewed as a method by which firms unload excess production in foreign markets. Usually companies transfer profit from their home markets to subsidise prices in a foreign market with a view to driving indigenous competitors out of the market and afterwards raise the prices.

Question 12

What is antidumping policies?

Answer 12

Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition.

Question 13

What does countervailing duties mean?

Answer 13

Countervailing duties is another word for antidumping policies.

Question 14

What is the political arguments for government intervention?

Answer 14

The political arguments for intervention is:

• Protecting jobs and industries
• National security (important defence-related industries are protected)
• Retaliation (gengældelse): basically using interventions to retaliate another governments intervention = trade-war
• Protecting consumers from “unsafe” products
• Furthering foreign policy objectives: trying to make an impact on another country either by ruining the country’s economy (US with Cuba to make the communist regime fall apart) or maybe to build stronger relations with that country.
• Protecting human rights
• Protecting the environment

Question 15

What is the economic arguments for government intervention?

Answer 15

1) The infant industry argument: many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that GOVERNMENTS SHOULD TEMPORARILY SUPPORT NEW INDUSTRIES (with tariffs, subsidies and so forth) UNTIL THEY HAVE GROWN STRONG ENOUGH TO MEET INTERNATIONAL COMPETITION.
2) The strategic trade policy:
- A government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises.
- It might pay a government to intervene in an industry by helping domestic firms coercive the barriers to entry created by foreign firms that have already reaped first-mover advantages (the flight industry with Boeing, Airbus and the big Chinese producer)

Question 16

What is the infant industry argument:

Answer 16

The infant industry argument: many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that GOVERNMENTS SHOULD TEMPORARILY SUPPORT NEW INDUSTRIES (with tariffs, subsidies and so forth) UNTIL THEY HAVE GROWN STRONG ENOUGH TO MEET INTERNATIONAL COMPETITION.

Question 17

What is the strategic trade policy about?

Answer 17

The strategic trade policy:

• A government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises.
• It might pay a government to intervene in an industry by helping domestic firms coercive the barriers to entry created by foreign firms that have already reaped first-mover advantages (the flight industry with Boeing, Airbus and the big Chinese producer)

Question 18

What did Krugman say about retaliation and trade-wars?

Answer 18

Both countries involved will be left worse off than if a hands-off approach had been adopted in the first place. In other words, stay with free trade.

Question 19

What is a trade-war?

Answer 19

When two (or more) governments use governmental intervention towards each other.

Question 20

What is the Smoot-Hawley Act and how did it affect the world economy and the Great Depression?

Answer 20

The Smooth-Hawley tariff was compounded in the US Congress in 1930 and was aimed to avoid rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products.

The Smooth-Hawley Act had a damaging effect on employment abroad. Therefore, other countries reacted to the US action by raising their own tariff barriers and US exports fell dramatically.

Smooth-Hawley Act ==> Higher tariffs ==> less import ==> reaction was protectionism from other countries ==> less export ==> loss of jobs

Question 21

What is GATT?

Answer 21

The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948. It lasted until the signature by 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995.

Question 22

What caused the protectionistic trend in 1980-1993?

Answer 22

1) The economic success of Japan during that time strained the world trading system (just like China is today)
2) Second, the world trading system was strained by the persistent trade deficit in the world’s largest economy, the United States
3) Many countries found innovative ways to get around GATT regulations (administrative policies for example)

Question 23

What did the Uruguay Round mean to GATT/WTO?

Answer 23

Facts: started in 1986. Agreement in 1993 and effective from july 1, 1995.

The Uruguay Round contained the following provisions:

1) Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to be scrapped on more than 40 percent of manufactured goods.
2) Average tariff rates imposed by developing nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history.
3) Agricultural subsidies were to be substantially reduced
4) GATT fair trade and market access rules were to be extended to cover a wide range of services (financial + telecommunications for example)
5) GATT rules also were to be extended to provide enhanced protection for patents, copyrights and trademarks (intellectual property)
6) Barriers on trade in textiles were to be significantly reduced over 10 years
7) The World Trade Organisation was to be created to implement the GATT agreement.

Question 24

What is the 3 main agreements within WTO?

Answer 24

GATT: The General Agreement on Tariffs and Trade
GATS: General agreement on Trade in Services
TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights

WTO members stands for about 97-98 % of world trade

Question 25

What is the main 4 unresolved issues within WTO?

Answer 25

1) The increase in Antidumping actions
2) Protectionism in Agriculture (US and EU especially)
3) Protecting Intellectual Property rights (big problem with China and other developing countries)
4) Market access for nonagricultural goods and services (some areas still have high tariffs)

Question 26

What is the Dubai/Doha round?

Answer 26

The WTO launched the current round of negotiations, the Doha Development Round, at the fourth ministerial conference in Doha, Qatar in November 2001. This was to be an ambitious effort to make globalization more inclusive and help the world’s poor, particularly by slashing barriers and subsidies in farming.

The negotiations have been highly contentious. Disagreements still continue over several key areas including agriculture subsidies, which emerged as critical in July 2006. According to a European Union statement, “The 2008 Ministerial meeting broke down over a disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a ‘special safeguard measure’ to protect farmers from surges in imports.” The position of the European Commission is that “The successful conclusion of the Doha negotiations would confirm the central role of multilateral liberalisation and rule-making. It would confirm the WTO as a powerful shield against protectionist backsliding.”

An impasse remains and, as of August 2013, agreement has not been reached, despite intense negotiations at several ministerial conferences and at other sessions. On 27 March 2013, the chairman of agriculture talks announced “a proposal to loosen price support disciplines for developing countries’ public stocks and domestic food aid.” He added: “…we are not yet close to agreement—in fact, the substantive discussion of the proposal is only beginning.”